Budget 2023: Startups seek tax benefits, policy support amid funding freeze

At a time when startups have been gripped by a funding winter that only stands to get exacerbated by the spectre of a global recession, the industry is seeking a liberalised tax framework, a more nuanced look at the ESOP (employee stock ownership plan) regime and policy incentives in the upcoming union budget that will support the growth of the ecosystem, augment the availability of capital and help companies navigate the economic crisis. “Despite recording several milestones within the startup ecosystem, ESOPs are still not considered a part of public market investments. If founders must continue to attract a strong talent pool, the taxation of ESOPs ends up being a big deterrent to attracting them. Incentivising ESOPs with simpler and appropriate tax structures similar to shares would make it an attractive wealth creation opportunity and shall also help startups attract and retain talent. It is a critical factor in strengthening our country’s GDP significantly,” says Mayank Kumar, co-founder & MD at upGrad.

IPO-bound Oyo’s ask from the government is to extend the benefit of ESOP taxation to all startups registered with the DPIIT. Much of the tax benefits are currently availed by startups that are certified by the inter-ministerial board (IMB) set up by DPIIT. The startup that operates in the hospitality space also believes that introducing PLI like incentive schemes in the services sector will go a long way in adding to the growth of the broader industry. “Specific service sectors should be included under the scheme and incentives should be provided on incremental earnings. SaaS (software-as-a-service) is one such possible sector considering India doesn’t have the same commanding position here as other software services,” the company says.

Manish Kumar, founder & CEO of supply chain finance platform KredX says that the fintech industry is hoping for some tax reliefs, especially under corporate income tax and GST. “Since the pandemic, the reduction in rates under Income tax has become crucial. Broadening of the tax base has been an unaddressed issue which needs to be considered and reviewed. We also anticipate some reductions in start-up taxes with no GST until annual revenue of ₹10 crore. This will assist SMEs in strengthening the economy. The industry also requires a depreciation on the fixed assets used by fintech companies to save on taxes,” says Kumar. Kumar is also batting for the provision of clarity on the regulations. “The fintech industry operates in a highly regulated space and any changes in regulations can have a significant impact on the industry. The government can consider providing more clarity on existing regulations, streamlining the process for obtaining licenses and approvals, and reducing the compliance burden for fintech firms,” says Kumar.

B2B e-commerce startup Moglix says the government should consider including ESOPs under long-term capital gain. “This will have a two-fold impact on the economy. ESOPs being one of the major drivers in the talent market, this initiative will provide taxpayers the ability to accumulate wealth while boosting the startup ecosystem,” says founder & CEO Rahul Garg.

One aspect that should be addressed in the upcoming budget is the dual taxation on ESOPs. Tax is levied on the exercise of ESOPs as well as on their sale in the market, which makes them less attractive to employees, and also creates a financial burden on the startups. By addressing the dual taxation on ESOPs, the government can help to create a more favourable environment for startups, making it easier for them to attract and retain top talent, says Upasana Taku, Co-Founder & COO, MobiKwik. “Also, reducing angel tax will help startups to conserve their cash flow, which is crucial for their survival and growth. The tax is imposed on the premium received by startups over and above the fair market value of shares, which can be a significant amount and can be a drain on the startup's finances. Addressing angel tax on startups will make it easier for them to access funding, grow their businesses and become more competitive in the global market,” says Taku. 

Kuppulakshmi Krishnamoorthy, global head, Zoho For Startups at Zoho says that the budget should provide for enough incentives and policy support for startups “that are making in India,” enabling the country to be self-reliant by not depending on imports. “This is particularly important for startups involved in deep-tech R&D that are helping build capabilities and know-how in the country,” says Krishnamoorthy.